Next downturn will take Nifty to 9,900: Gautam Shah, JM Financial

Home Markets Next downturn will take Nifty to 9,900: Gautam Shah, JM Financial
Next downturn will take Nifty to 9,900: Gautam Shah, JM Financial

This looks like a classical downtrend which is peppered with small short sharp rallies from time to time, Gautam Shah, Associate Director & Technical Analyst, JM Financial, tells ET Now.

Edited excerpts:
Where is the market headed? Would you say that worst of the pain is behind us or do you think much depends on how US equities pan out now?

Volatility is here to stay and this is clearly not a market for the faint hearted because we need to have risk management strongly in place to trade or invest in todays market environment and I would like to believe that this is a classical downtrend which is peppered by small short sharp rallies from time to time.

It all started in the early week of September when the markets broke some very important supports which gave you an indication that this is not a typical pullback but a much bigger downtrend in play. I would like to believe the entire upcycle which started off in early 2016 from levels of 7000 on the Nifty got completed at levels of 11,700 on Nifty last month.

Since the big upcycle got completed, the markets just need to retrace or digest those gains that we saw in the last two, two and a half years and this is that retracement which is taking place. I would like to believe that the markets are not out of the woods. There is going to be a lot more consolidation and choppy action going forward before we can actually stabilise. Todays action looks very good on screen, at best it can take the Nifty towards 10,550 which is now an important resistance and a sort of ceiling for the market for the next five to ten days.

From around those levels, the next leg down takes the Nifty to around 9900 which is our working target for this leg of the down move. One has to be conservative at these levels. If you look at the global set up, it looks very negative because the global markets have started a multi-week, multi-month downtrend. If that is there to stay, then Indian markets are not insulated from a global decline.

When you say the next downtick will take us to 9,900, how bad could it get from there?

The fall from 11,700 to almost 10,200 yesterday has been very swift. In this fall, we have not even seen two or three days of pullback action. It is understandable that the market remains very oversold from an extreme short-term perspective and that is probably the reason you are seeing these sharp pullbacks of about 100-200-300 points on the Nifty.

The fact that the volatility index is trading at levels of 18, 19 and 20, really justifies that. This is a long drawn process. I do not think the market can get out of the woods immediately. People have memories of the last six months wherein we corrected. We found a bottom and then we started a new trend that took us to new lifetime highs. I do not think that is going to happen in the current scheme of things and therefore while our working target is 9900, it is more of a base case.

We believe that the US markets can potentially see a 15% to 20% drop from current levels that is big by all standards and if that were to happen, Indian markets will have to move in tandem. Having said that, the pain in the broader markets is not going to be so much. It is mainly the F&O stocks and the index stocks that are really likely to be hit because the broader market is already down about 40-50% from the highs.

The selling pressure has got arrested to a certain extent. Even if the markets were to see another leg down, the broader markets will just stay sideways or might outperform a little bit. The front line stocks are likely to see more downside ahead.

You are seeing first signs of profit taking coming in TCS and the markets are ignoring the earnings delivered yesterday. What do you think is going to lead the decline sectorally within the largecaps from here? How much further will financials fall?

It is definitely not done with. There is a lot more pain left in the financials. What has happened in the last few weeks is that the market has not found any leadership from any of the sectors. There was a time wherein the market fell and the IT stood very strong but we turned extremely bearish on the IT index a couple of weeks ago because we thought that the big upcycle in the IT sector was completed at around 16,000 on the CNX IT index.

This index had seen a 60% rally in the last 15 months and therefore it just needs to digest that move and since our view on the foreign Nasdaq index is so negative, we believe that that index can come down to levels of 6,300, the worst case scenario is 5,500. If those levels were to come by, Indian IT is going to be hit. You are seeing the first signs of underperformance of the Indian IT sector right now. This is going to continue and the CNX IT index could see another 10% downside from here.

Coming to the financials and banks, that is the problem area. The banks have not given any indication or strength. There are no evidences to believe that a bottom is taking place. Some of the larger banks in the market are actually developing a very weak setup and we believe that the Bank Nifty can come down to a level of 23,500, which is a good 2,000 points away from where we are trading right now.

There is some resistance around 25,500-25,700 that looks like a ceiling for this particular move. But this is definitely a good opportunity to get out of these two sectors, which I just mentioned and possibly looked at sectors like pharma, auto and oil and gas which could outperform in the overall scheme of things.

Which are the better looking charts according to you right now? In which sector are you seeing an upward trending move?

The market is not seeing any relative strength across sectors. Just about every sector in the market has been hit. The pharma index has a much better setup in the current scenario and it has done so badly in the last 10 to 15 days. I would like to believe that over the next 6 to 12 months, the pharma index could actually see an upside of about 15% to 17%.

That is clearly a buy and hold. It is a sector where you need to hide in the current fall. Secondly, the decline in the auto index has been large. It is now at a very important support of 19,000 and from here, you could see a nice rebound of about 5% to 7%, maybe even 10%. Going forward, pharma and auto are the two spaces which are likely to outperform. Most other sectors in the market have pretty much negative set up, having broken some very important medium-term support. So, theres no relief there.

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